Explain the following methods of providing for deferred tax and indicate which is the preferred method under IAS 12( Income Taxes
(i) Nil provision
This is where the financial statements are prepared without reflecting all the effects of tax ie there is not provision for deferred taxes.
(ii) Partial provision
Under this approach deferred tax is provided but not on all temporary differences. The management uses a subjective approach in deciding which temporary differences may crystallize.ie you provide for future tax consequences to the extent that you have reasonable evidence that it will reverse within a reasonable period of time usually 3 years.
(iii) Full provision
Under this approach, deferred tax is provided for all temporary differences including those that may not crystallize.
IAS 12-Income Taxes recommends the use of full provision method incase of use of income statement liability method.